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Well-Funded NGM Bio Nabs $200M To Boost Merck’s Metabolic Pipeline

Call it a long, lucrative leash. In a deal announced today, NGM Biopharmaceuticals of South San Francisco, CA, has signed over 15 percent of its equity and potentially much of its preclinical work to Merck & Co. (NYSE: MRK), but the arrangement also gives NGM an unusual amount of freedom.

Here’s why it’s lucrative: Merck is paying a $94 million upfront fee and another $106 million in cash for 15 percent of NGM’s stock. The equity purchase instantly values NGM at $706 million. For that outlay, plus up to $250 million more in R&D subsidies, Merck gets rights to a preclinical candidate with promise in diabetes, obesity, and non-alcoholic steatohepatitis—a fatty liver condition that can lead to cirrhosis and cancer—and the option to license many of NGM’s preclinical drug programs once they complete Phase 2 trials. (The agreement doesn’t cover anything NGM has already partnered with other drug companies or NGM’s lead program, currently in Phase 2b to treat primary biliary cirrhosis.)

Here’s why it’s a long leash: NGM will decide how to move programs forward from research into early development and through Phase 2. Much of the R&D tab will be picked up by Merck; the $250 million figure is $50 million a year for the five-year arrangement, with “other mechanisms” for more if needed, according to NGM president Jeff Jonker.

And once Merck triggers an option and takes over Phase 3 development of a drug, NGM will have the chance to share in its revenues and help Merck sell the drug in the U.S. That’s a nice perk that small biotechs like NGM—with 80 people on board—don’t often get when dealing with big drug companies.

Its lead program came from insights that founder and chief scientific officer Jin-Long Chen had about the effects of gastric bypass surgery on metabolic chemistry. Immediately after the surgery, well before patients would start to lose weight, Chen saw the body would begin to reverse the dangerous conditions that underpin or can lead to diabetes. What was it about the surgery—essentially making the stomach smaller and rerouting food through the intestine—that immediately changed patients’ chemistry?

Much of NGM’s work stems from that question and subsequent inquiries. For its lead program, NGM says it has re-designed FGF19, a key hormone in post-surgical metabolic changes, to remove its potential for provoking liver cancer. It has also formed research partnerships with AstraZeneca’s MedImmune division, Daiichi Sankyo, and the Juvenile Diabetes Research Foundation that all target diabetes and obesity. (Another program, with Johnson & Johnson’s Janssen Pharmaceuticals, has been wound down.)

But Jonker says the firm has also dived into other places that researchers looking for drug targets either have avoided because the “biology has been incredibly complex” or have tried to exploit and failed. Those efforts, which he declined to describe in detail, don’t lend themselves to as “linear a path to discovery” as the gastric bypass-inspired investigations, but he said the Merck deal was a vote of confidence in those other pathways.

“NGM has developed a uniquely powerful research program that has permitted identification of novel, and quite consequential, pathways for metabolic regulation,” Merck Research Laboratories president Roger Perlmutter said in a statement.

The deal is also a reconnection of many intersecting personal pathways. Until 2012, Perlmutter was the top scientist for many years at Amgen (NASDAQ: AMGN). NGM founder Chen, CEO William Rieflin, and chairman David Goeddel were all at Tularik, a Bay Area oncology developer Amgen bought in 2004 for $1.3 billion. (Goeddel was CEO, Rieflin was CFO, and Chen was its “superstar biologist,” as Rieflin told Xconomy in 2013.)

When Chen was ready to start a company to pursue his insights, Goeddel, by then a partner at VC firm The Column Group, led the Series A investment. Goeddel was also the first scientist hired at Genentech. After Goeddel helped fund NGM, Art Levinson, who was transitioning from Genentech CEO to the chair of Genentech under Roche ownership, joined the board.

NGM raised more than $100 million through its first three venture rounds, and the Merck investment pushes the total well north of $200 million.

The 15 percent stake Merck is buying is all new shares, and there’s a structure in place to let Merck buy more shares if and when NGM goes public, Jonker says.

With all that cash, NGM has built a formidable foundation, and an unlikely one in these days of cautious investors and virtual biotechs that seem to share and outsource everything. It does much of its own work in-house, making enough of its own synthesized proteins to use in clinical trials and developing proprietary types of rodents for its own testing purposes. Those might seem like small details, but they’re not something startup biotechs have the luxury of doing often.

The firm is zigging while so many other biotechs are zagging thanks to what Jonker calls a “somewhat contrarian” group of venture backers who include the Column Group, Takeda Ventures, Prospect Venture Partners—which gave up plans in 2011 to raise another fund—Rho Venture Partners, Topspin Partners, and the investment arm for McHenry “Mac” Tichenor, Jr., whose family’s radio stations eventually became a part of the Spanish broadcast powerhouse Univision.

Alex Lash is Xconomy's National Biotech Editor. He is based in San Francisco. Follow @alexlash